$4 Gas Won't Go Anywhere

Some people speculate that gas prices are a bubble. From the trends out there, I think that they are not. Here's my figuring:

If at any point the public psychology agrees that oil prices will go down, then many people will breath a hasty sigh of relief and go right back to making bad decisions. We Americans have reduced how much we drive since last year. If gas goes back to $3, we'll snap right back to driving as much as we used to or even more. We'll snap right back to buying vehicles that are really too large for our daily needs. We'll snap right back to flying and driving everywhere for vacation. Whatever reprieve a return to lower gas prices would bring would be quickly eliminated by a surge from pent-up oil demand. We WANT to drive our cars and fly our planes and commute from way too far away. That fact will disallow prices from falling.

Add to that American-centric analysis a global perspective. Does anyone reasonably believe that world oil consumption will decrease in the near- to mid- future? We have a world food crisis--and what is required to grow food? Fertiziler! And where does fertilizer come from? Oil! And here we can do the same analysis, but on a world stage. People are literally starving and rioting. In this environment food prices cannot come down. The second they do, the food supply will be overwhelmed by the demand.

What's the common problem underlying both of these? Excess demand. The worst thing is that this is not excess demand for cell phones or Nintendos. We're talking about food and gas: two commodities categories for which we would pay any price in one way, shape or form.

So the long and the short is that we have a missallocation between quantity demanded and quantity supplied. The resources will go to the highest bidders. Those who cannot bid higher go on riots or other protests. Across Europe and parts of Asia, truck drivers, fishermen and other people are protesting/striking against high diesel prices. They are lucky compared to those protesting/striking against prohibitively high food prices. And we who can drive less, buy smaller cars, and ride buses and trains to square away our financial woes are the luckiest of all.